3 Minute Gold News

Jim is the editor of Strategic Intelligence, Chief Global Strategist for West Shore Funds, former general counsel for Long Term Capital Management, and a consultant to the U.S. Intelligence community and U.S. Department of Defense.

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Jim Rickards

The Fed won’t get to four interest rate hikes. There will be one hike for sure, and probably two, and then they’ll stop.

The reason they’ll stop is because the Fed will see by the summer what everyone else sees today — we’re in a recession.

Why doesn’t the Fed see it today? Because they’re model based and their models are telling them the U.S. is not in a recession. The Fed doesn’t look at the real world and that’s the problem. That’s why they’re the last to know.

We’ve been in a growth depression since 2009 and we’ve had about 2% growth. It actually looks like in the fourth quarter of 2015 was well below 1%, and the full 2015 year is going to be below 2%, which is down from the year before.

The U.S. potential is 3 – 3.5% so that gap between 2% and 3% is called a growth depression. That’s just the state of the world. Whether the U.S. is in a technical depression remains to be seen, but it’s close enough.

IMPACT OF THE DECEMBER RATE HIKE

There’s an impact in emerging markets, in the stock market, in capital outflows, and in China. There’s a dollar shortage around the world.

Everyone said that the 25 basis point interest rate hike in December was a tiny “who cares” amount but that’s not how markets think. Markets ‘discount the future’. There was uncertainty about whether they would raise or not — that’s one state of the world. But once they actually raised they removed the uncertainty and moved people to thinking, “What are the future expectation about rate hikes?” You have to move the whole yeild curve forward.

The Fed has been tightening since May 2013. They were talking about tapering, then they did the actual tapering in 2014, and then removed Forward Guidance in March 2015 — those are all tightening moves.

Monetary policy works with a lag but the Fed doesn’t live in the real world. They are very high IQ individuals who have spent their whole lives either in universities, in think tanks or in the Federal Reserve itself.

They are very disconnected from everyday Americans and actual markets. They rely on models.

Their models are obsolete but you have to study them to understand the mistakes they’re making. Jim uses his own models but the Fed doesn’t use his models they use their own.

The Fed uses an Equilibrium Model but the world is not an Equilibrium System, it’s a Complex Dynamic System, so their policy is flawed.

THE NEW CASE FOR GOLD

The arguments about gold have been going on forever — let’s say 5,000 years.

But since 1971 when President Nixon stopped the redemption of overseas dollars for gold there’s been no gold standard in the world.

People have been debating whether we should go back to it.

The point of Jim’s new book The New Case for Gold is that there are new 21st century arguments in favour of gold.

These reasons include cyber financial warfare, the war on cash, and power grid vulnerabilities.

What if all the ATMs were shut down?

What if some foreign power, Iran or someone else, hacked into your bank account and wiped out your savings?

When Jim talks with billionaires they explain that they stock and bonds, and Jim tells them that means they have electrons — digital wealth. Very little of their wealth is in physical, tangible form.

All their digital wealth can be wiped out by a Chinese or Iranian or other foreign power’s cyber brigade.

These are reasons to have gold. It’s physical and non-digital. It can’t be hacked or erased.

That argument wasn’t on the table thirty years ago but it is today.

GOOD TIME TO HAVE GOLD?

There’s a bit of a tug-o-war going on.

The Fed says they want inflation and they have a target of 2% inflation. They haven’t come anywhere close to it in three years and it’s actually moving away from them but they want it.

They are tightening monetary policy and raising interest rates, but that makes the dollar stronger which is deflationary, and that is the opposite of the inflation they want.

So if you have an inflationary goal and you’re pursuing a deflationary policy how does that work?

It doesn’t work. It makes no sense.

Everyone knows gold does well in inflation. That’s easy.

The Fed will get their inflation sooner or later.

Gold also does extremely well in deflation. In 1933 the U.S. had just gone through the longest sustained period of deflation in American history, and gold went up 75%.

The reason gold went up is that the government made it go up because they were so desperate to get out of the deflation that they raised the price of gold in order to raise the price of everything else.

So gold does well in inflation and it does well in extreme deflation because people will get desperate and they’ll raise the price of gold.

Right now Jim is surprised that gold hasn’t gold lower. Oil is down 70%, iron ore is down 70 – 80%, and copper is down 70 – 80%. But gold is only down 50% from its high.

It’s doing pretty well relative to all the factors, and it seems to now have a pretty strong foundation.

A GOOD WAY TO INVEST IN GOLD

When a person considers buying gold in an ETF, mining stock or physical gold, Jim recommends physical gold partly for the reasons that are mentioned above.

He recommends you keep it in non-bank storage because banks will be vulnerable. If governments decide to seize the gold they’ll start with the banks because they can regulate them. There are very well established, reputable non-bank vaults for storage.

Jim doesn’t recommend gold futures because one of the problems is that when everyone demands their gold in an enormous short squeeze the exchange won’t give you physical delivery. They’ll shut down the contract and pay you yesterday’s closing price in paper dollars.

They won’t steal your money, but you’ll get paper dollars at yesterday’s price and you’ll miss out on the big move that’s happening today.

All the futures exchanges have rule books that say they can do that. They can do something called ‘Trade for Liquidation Only’ which means you can’t actually take physical delivery.

It’s the same with ETFs. These things have loopholes like force majeur and exceptions clauses which means when you really want your gold you’re not going to be able to get it.

GOLD JEWELRY

So you can justify buying gold necklaces and rings. The India government says they have only 500 tonnes of gold, but the citizens love gold jewelry so India has more like 15,000 tonnes of gold.

Mario has some friends
Just a merry old band of women and men
Who watch him do little and less
while he’s fixing this little mess
And we all wait with baited breath
to see what Mario’s
going to do next

Janet has some pals
Just a circus net filled with guys and gals
Who watch her do more and much
but she seems to have little luck
Still we all wait with baited breath
to see what Janet’s
going to do next

Christine has a club
With a special basket filled with hawks and doves
Who join up left and right
and draw their claws to fight
And when no one has any feathers left
We’ll see what Christine’s
going to do next

The copybooks of the early 1900s gave us all the wisdom we need. The sayings that were copied are the truths, the gods, of our world. All the empires who followed the gods of the marketplace instead have fallen, and there’s terror and slaughter when the gods of the copybook headings return. The lyrics are by Rudyard Kipling. One of my gurus.

See the bankers wave their Wall Street wands and conjure piles of paper green. Naked short selling is like betting that your neighbour’s house will burn down. But in this scenario it happens to burn down. If the bankers win then we lose the whole world as we know it. I wrote this in 2009, with a lyric “A little grease (Greece) is floating out to sea, and little pigs (Portugal, Italy, Greece and Spain) are bobbing up and down, they’ll send a storm and we’ll see, when the tide goes out who’s naked on the beach“, and it’s coming on now. The world is changing as we know it.

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Nothing on this site is intended as individual investment advice. We’re all watching which way the wind is blowing.